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For Once, Let's Be Thankful To Our Big Brother' in OttawaBy Robert BrownShorter Mortgage Amortization Periods Good Public Policy
For Once, Let's Be Thankful To Our Big Brother' in OttawaBy Robert BrownShorter Mortgage Amortization Periods Good Public Policy
ca
http://umanitoba.ca/outreach/evidencenetwork/archives/7108
Lets do some arithmetic. Consider a $100,000 mortgage (most mortgages are much larger, but you can get to the answer to your personal situation easily by multiplying by the size of your mortgage). I will assume todays five-year mortgage rate of 5.24%. If you take out a mortgage to be paid off over 30 years, your monthly payment will be $548.10. Over 30 years, you will pay a total of $197,316 or $97,316 in interest. If, however, you choose the 25-year mortgage, your monthly payment is $595.34 (or $47.24 more a month). Over 25 years, you will pay a total of $178, 602 or $78,602 in interest, which is only 80% of the interest you pay on the 30-year mortgage. Further, you will own the house debt free five years sooner. Now, if interest rates rise, the arithmetic is more dramatic. Consider a $500,000 mortgage at 6%. If you choose the 30-year mortgage, you pay $2974.12 a month for 30 years or a total of $1,070,683 or $570,683 in interest. Using a 25-year mortgage requires monthly payments of $3199.03 ($224.91 larger) for a total payment of $959,709 or $459,709 in interest. In other words, for an extra $7.39 a day, you can own your house 5 years sooner and pay a whopping $110, 974 less in interest. If a home buyer cannot afford an extra $7.39 a day in mortgage payments, should they be in the market? Arent we all really better off with the shorter amortization period? The bottom line: the impact of this new legislation is less pain than pragmatism. For once, we should be thankful to our big brother in Ottawa. Rob Brown was Professor of Actuarial Science at the University of Waterloo for 39 years and a past President of the Canadian Institute of Actuaries. He is currently an expert advisor with EvidenceNetwork.ca.